The 'no frills' network provider

Last night I attended a function for luminaries of London's banking and financial services industry. Surrounded by bankers and technologists, one attendee remarked to me 'Isn't this a little dry for you?' One doesn't make a habit of attending after hours functions frequented by City bankers talking shop.

However, on this occasion I was motivated not only by the prospect of some banker letting slip a little tidbit of information, which may give me something to share with you on the blog. The main reason for me attending was to hear SWIFT CEO Leonard Schrank speak in less formal surroundings than the Sibos conference (yes, I know I am a glutton for punishment, as if I hadn't heard enough SWIFT speak at Sibos in Sydney). Away from the rehearsed script and glitzy video presentations, I thought Mr Schrank may make an off-the-cuff remark that would have his PR people tearing their hair out.

I have to say I was disappointed. Lenny as he prefers to be called in less formal surroundings, delivered a précis of the opening plenary speech he made at Sibos in Sydney, interspersed with a few personal anecdotes. It was along the lines that SWIFT's future growth strategy hinges on being able to conquer the BRIC countries, standardising derivatives contracts and enhancing corporate access to its network.

We had heard it all before, but Mr Schrank admitted that his own personal knowledge of the derivatives industry was limited (it appears some people would not know a credit default swap if it jumped up and bit them on the nose). But given SWIFT's successful track record in standards development, it does not see any reason why it cannot standardise a derivatives contract.

One of the questions from the audience was whether SWIFT would take the next step of allowing interoperability between corporates without them having to join a Closed User Group (CUGs)? It seems however that SWIFT is only focused on the Top 2000 corporates, the GE's, Microsoft's and IBM's of the world that are multi-banked and can afford to participate in CUGs. SMEs do not figure in its 2010 growth strategy.

Interestingly, at most banking events these days, the name PayPal rears its head. Bankers like to punish themselves by saying, 'Why didn't we think of that?' Well you didn't think of it, so get over it and move on, or take a leaf out of SWIFT's book. Apparently SWIFT executives do not lose sleep at night worrying whether PayPal is going to be the next biggest online threat to their business.

But it does raise an interesting question. Where is SWIFT's next biggest threat going to come from? Schrank did allude to the card providers such as Visa, but it is owned by the banks, and as we know banks are not known for moving quickly or being innovative. Some of the dinner guests also reminded me that SWIFT is a monopoly and despite the annual rebate carrot it likes to wave in front of its members, it is expensive compared to other IP networks.

A charming banker from India sitting next to me said he did not think SWIFT would be successful in expanding its network into emerging markets as most of India's domestic banks could not afford to connect to SWIFT. Furthermore, he said, India already had its own TCP/IP network, INFINET (Indian Financial Network), which is used for messaging, electronic debit and clearing, online processing, trade in government securities, centralised funds and inter-branch reconciliation.

I asked another gentleman at my dinner table as to why given the proliferation of internet bandwidth and the ubiquitousness of the internet, there were no serious contenders to SWIFT. He replied that there would be, comparing it to what had happened in the airline industry with low cost 'no frills' airlines emerging to challenge the hegemony of airlines like British Airways.

But there are already IP network providers that could challenge the dominance of SWIFT as the major financial messaging network. Looking at the intelligence Cisco Systems is embedding in its network, anything is possible. But why are networks like Cisco, BT Radianz and Savvis not providing a serious alternative to SWIFT? Part of the reason appears to be security. As SWIFT likes to remind its members, who may be tempted to jump ship to another network, in its more than 30 years of operations, no one has seriously cracked its multiple layers of authentication.

For now SWIFT can continue to rely on the robustness of its network. However, as a leading figure from UK bank Barclays pointed out, at some point the Belgian banking co-op may need to address splitting the standards it carries on its network from its governance. That however is unlikely to happen any time soon.

Although SWIFT may be happy to carry other standards on its network, like FpML for example (one audience member remarked it had no choice), Schrank does not believe its future lies in just providing the bandwidth or the pipeline that carries financial messages. With Schrank scheduled to retire next year, one wonders what his successor will make of all this? Will it be more of the same from SWIFT or a fresh approach?